Discounting is for Dummies – Part One

For many years, hoteliers have been throwing away potential revenues right-and-left, offering huge discounts to lure bookers back from the OTAs and alternative accommodation options. I’m here today to tell you something that I need you all to hear: discounting is the best way for your hotel to go from profitable with a high cost of acquisition, to a property with high occupancy, a low cost of acquisition, but (and this is a BIG but) one that is barely able to afford to stay in business.

I know that if I listened very carefully right now, I would hear many hoteliers angrily protesting: “That’s not true; my hotel has used discounting and it always yields positive results for us. That’s why we keep doing it!”

In response to that, I say: “True, discounting can increase occupancy in the short-term – through both the OTAs or direct channels; however, in the long-term, you will be severely undercutting your ADR and RevPAR.

Remember, occupancy isn’t what keeps the lights on and bank accounts full; ADR and RevPAR do.

To those hoteliers who are still grumbling in disbelief, let me share an example of why discounting is NEVER a good strategy – even in the short-term – no matter what type of hotel, flagged or independent, size or its geographical location.

It always starts out well; the revenue manager at your hotel decides to offer a small discount, but only for a short period of time so that you don’t drastically decrease their ADR or RevPAR, or undercut the property’s brand value proposition. Sounds good so far, right?

Good news! Your property’s occupancy increases… for a short while.

But then, the competition in your destination catches wind of your successes and discounts their room rate even more. Your revenue manager doesn’t want to lose bookings over a few dollars, so he/she lowers the room rate one more time, to get back on top. Then, the other hotel goes even lower and…

In many cases, hoteliers and revenue managers repeat these price reductions again and again, until the hotel is full but barely earning the money that they need to cover the cost of doing business.

Food for thought… I’m convinced that every revenue manager has seen and is very familiar with that tried-and-true ‘Price is Right’ strategy: betting $1 lower than the lowest price – and, on the show, the contestants would often win, making it a great gameshow strategy.

Could we all have woken up one day and decided that this was our new modus operandi (for those whose Latin is a little rusty, that loosely translates to “a method/mode of operating” and is “used to describe a firm’s preferred means of executing business”)?

My answer: I am sure of it because discounting is the hotelier’s version of that strategy; but, as I said earlier, it’s not the right way to increase occupancy, direct bookings or profit. Why?This isn’t the ‘Price is Right’; this is the highly competitive and ever-changing hospitality industry. By using the ‘Price is Right’ strategy, your hotel must continue discounting your room rate (whether it’s by $1 or $10 each time) on the already discounted rate to remain competitive, creating an ongoing race-to-the-bottom and a recipe for financial failure over the long-term – not just for your hotel, but for all hotels, industry-wide.

Because, while we’re over here giving away the house (or room, in this case), the OTAs are sitting back, watching as we price ourselves out of business – even further compromising our ability to drive direct bookings, while maintaining profitability.

I’ll say that one more time (for the cheap seats in the back!): in our search for hoteliers’ elusive holy grail (direct bookings), we’re helping the OTAs keep their death-grip on their share of the market and hurting our bottom lines in the process. And when you combine that with the OTAs’ HUGE marketing budgets and high-tech everything (another advantage), hotels’ outlooks are looking more and more ‘sad face emoji’ by the day.

So, once and for all, let’s throw the old standby, ‘Price is Right’ method out the window and shout it loud-and-proud from our rooftop patios: “Discounting is for dummies!”

Thumbs-up emoji!

Want to know what revenue management strategy you should be using to boost direct bookings without discounting?

Check back next week to read Part Two of this article where we will outline how to boost direct bookings, minimize the cost of acquisition and take back their fair share of the marketplace – without negatively impacting your bottom line at all. Trust me, you will be happy to that you did!

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